A perfect example of "zombie economics" could be found at the national 'American Economic Association' meeting last weekend. Despite years of failed policy and theoretical calamities, myriads of differing opinions about the future of our country remain. Economics stand divided in the trenches of these undead ideologies. Berkeley economists praised the present administration for recent amendments to fiscal policy. And yet, Carnegie Mellon economist Allan Meltzer simultaneously warned that these new measures of could actually lead to major financial woes into the future.
Off of this all, what do you think of the Fed's role? Better? Worse? Does it really matter what we think, when our very own textbooks stand to be re-written in a few years? (**Sigh**)
I think the FED's role, as always, depends and answers certain interests. It means that the common people who lost or are about to lose their houses are not including, although in the politician speeches they are there. Everyone can realize about it, when the FED's topic was limitedly discussed in the Presidential debate.
ReplyDeleteOn the other hand, the FED has begining to speak romantically when the reality is complicated. They try to tie interest-rate to unemployment and inflation. However, each of them has different levels which are difficult to match. Certainly, the FED are trying to fix one credit bubble with another. The FED has acquired around trillions of dollars in bonds.
Finally, I am not sure if the problem is what we think or how we act. Many people reject the classic ideas but never go beyond the critics. This does not mean that criticism is not neccessary. The problem is that economics progresses funeral by funeral.
I think the Fed deserves a bit more credit than they've gotten. Their quick thinking with the bailouts almost certainly averted a depression and the successive rounds of quantitative easing have probably aided the recovery, even at the zero lower bound.
ReplyDeleteEven more encouragingly, the Fed has started pursuing an explicit unemployment target and easing up on their inflation target. This comes closer to the NGDP targeting that advocates like Scott Sumner and Matthew Yglesias think would be more effective than interest rate targeting, especially at the zero lower bound. Scott Sumner feels that, contrary to popular belief, monetary policy has not been especially loose given the circumstances. This was his response to one criticism of further monetary action:
"The Economist is not infallible. The Christmas issue also contains one of the worst sentences ever written:
'A further monetary boost may help add zip to the recovery, but risks producing asset bubbles.'
Yes, and giving food to starving refugees in Darfur might help, but risks producing obesity."
Here's the link to his article about the economist: http://www.themoneyillusion.com/?p=18561
And about the Fed's move to unemployment and inflation targetting: http://www.themoneyillusion.com/?p=18122
Andrew makes a good point by saying that the textbooks used to make decisions will be re-written in a few years. It is a bit scary to think that economic decisions, affecting the lives of millions, even billions of people, are essential based off of trial and error.
ReplyDeleteUnfortinailly, the article only affirms this notion. As highlighted in the article, Mr. Plosser is reported saying what the threshold system "doesn't tell you is how we are going to react." The FED seems to be using the policy tools they can, but in the end the outcome is uncertain. The mechanics of economic are not simple. When dealing with people and a systems based on human interactions, the best we can do as economists is make assumptions and hold all other variables constant. What happens when behavior changes these assumptions?
On the topic of the FED not doing enough, there seems to be so much debate on the FED’s role. Where some economists think they are doing too little and others think they are doing too much, I am torn on which side to agree on. Something important to note is that though the FED is in charge of monetary policy, they also do other things such as set banking regulations, promote foreign banking growth, etc. I believe the FED should be implementing monetary policy when need be, but also use their other functions as an alternative or add on. For example, if monetary policy was implemented to lower interest rates, this action should be followed up by an increase in banking regulation and oversight. By using monetary policy in conjunction with their functions, the FED can set checks and balances on the monetary polices they are using.